Cost Reduction Programs - Why They Are Healthy and How They Can Be Successfully Implemented

Driving forces demanding cost reduction

Today's competitive business environment demands that ongoing cost reduction is a healthy and in many cases vital activity of any business. Market dynamics, low-cost country imports, regulatory changes, disruptive technologies, competitive pressure, production costs, inherent product design cost, labour costs, primary costs, life cycle maturity, and competitor pricing all put pressure on profitability. I recall a saying; "The difference between a mediocre and a good profit is often a cost reduction program".

Even if you are fortunate and your business doesn't suffer from the above external influences, it is highly probable that you would still want to optimise your profitability and implement a cost reduction program.

Benefits

Cost reduction plays a key role in improving a business's well-being, not only in terms of increased profit (typically 5%+ EBITDA) but also released cash and increased competitiveness. Strategic leaders quickly realise the potential to strengthen and position their organisation for growth.

Challenges & the way forward

The majority of business leaders want to reduce costs but experience difficulty realising their desires, engaging the organisation, and making cost savings stick. This is the crux of the problem faced by nearly every organisation.

Every department and division of a company is responsible for both cost reduction and staff engagement in the various programs. All too often it is seen as a management or finance department responsibility.

Staff should be encouraged to identify opportunities, conduct analysis, propose solutions and prepare business cases and project plans. A steering committee (including senior management) should review the opportunities and decide the order and priority in which initiatives are resourced and converted to cost savings.

A myriad of opportunities will be identified including organisational behavior, alternate designs, process enhancements, supplier improvements, purchasing initiatives, quality improvements, efficiency improvements, waste reduction etc. There are in fact too many examples to list here.

It should be appreciated that the majority of sustainable cost savings will require significant investment in terms of labour and cash. Leaders must be both committed and seen to be committed.

To ensure a sustainable and ongoing cost reduction program, it is important to engage the wider company and that all staff be involved in both identifying and implementing the savings program. To this end, open and regular communication of progress and achievements is extremely important.

Cost reduction must be an ongoing, living breathing part of any company. It should not be a short-lived, once off "top management" initiative.

Cost reduction initiatives frequently burden already stretched resources. Initiatives may be temporarily deferred due to resource availability but management should not continually defer or the overall program will lose momentum and grind to a halt. Short term additional resource or task reallocation is a preferable solution to permit the cost saving initiative to proceed.

Ensuring Success

To increase success and implementation pace it is advisable to adopt a tried and tested cost reduction program.

Success breeds success. Cost saving will become part of the way you do business.